Longer-Odds Strategies for Creating Value from Acquisitions  597 present. That’s because most hospital systems are local, so insurers are com- petitors only if they serve the same local market. For insurers that operate in different cities, combining therefore does not put them in a stronger position to gain purchasing benefits from these local hospitals. While economies of scale can be a significant source of acquisition value creation, rarely are generic economies of scale, like back-office savings, signifi- cant enough to justify an acquisition. Economies of scale must be unique to be large enough to justify an acquisition. Pick Winners Early and Help Develop Their Businesses The final winning acquisition strategy involves making acquisitions early in the life cycle of a new product area or industry line, long before most oth- ers recognize that the industry will grow. Typical examples come from the medical-device business, where larger companies buy young, innovative com- panies, help them refine their technology, and accelerate and turbocharge their product launches. It’s not unusual in these cases, though, for a payoff to take five or more years. This strategy can involve a high level of risk. Consider the example of cannabis in the United States. At the time of this writing, several state govern- ments have legalized the recreational sale of cannabis, which remains illegal to possess or sell under federal law. Some major consumer-goods companies have purchased cannabis companies in anticipation of high growth, despite uncertainty about how the industry will develop and fit their business model. We won’t know for a while how this will play out. This acquisition strategy requires managers to take a disciplined approach in three dimensions. First, you need to be willing to make investments early, long before your competitors and the market see the industry’s or company’s poten- tial. Second, you need to make multiple bets and expect some to fail. Third, you need to have the skills and patience to nurture the acquired businesses. Longer-Odds Strategies for Creating Value from Acquisitions Beyond the six main acquisition archetypes just described, a handful of other acquisition strategies can create value. However, these are more difficult to execute successfully. Rolling Up Roll-up strategies are used to consolidate highly fragmented markets, where the current competitors are too small to achieve scale economies. An exam- ple is Service Corporation International’s roll-up of the U.S. funeral business. 598  Mergers and Acquisitions Beginning in the 1960s, Service Corporation grew from one funeral home in Houston, Texas, to almost 2,000 funeral homes and cemeteries in 2018. The strategy works when the businesses as a group can realize substantial cost savings or achieve higher revenues than the individual businesses. For ex- ample, Service Corporation’s funeral homes in a single city can share vehicles, purchasing, and back-office operations. They can also coordinate advertising across a city to reduce costs and realize higher revenues. Size per se is not what creates a successful roll-up. What matters is the right kind of size. For Service Corporation, having multiple locations in the same city has been more important than simply having many branches spread over many cities, because the cost savings, such as sharing vehicles, can be realized only if the branches are near one another. Because roll-up strategies are hard to disguise, they invite copycats. As oth- ers tried to copy Service Corporation’s strategy, prices for some funeral homes were eventually bid up to levels that made additional acquisitions uneconomic. Consolidate to Improve Competitive Behavior Many executives in highly competitive industries hope consolidation will lead competitors to focus less on price competition, thereby improving the indus- try’s ROIC. However, the evidence shows that unless an industry consolidates down to just three or four competitors and can keep entrants out, competitor pricing behavior does not change: there’s often an incentive for smaller com- panies or new entrants to gain share through price competition. So in an in- dustry with ten competitors, lots of deals must be completed before the basis of competition changes. Enter into a Transformational Merger A commonly mentioned reason for an acquisition or merger is to transform one or both companies. Transformational mergers are rare, however, because the circumstances must be just right, and the management team needs to ex- ecute the strategy well. The best way to describe a transformational merger is by example. One of the world’s leading pharmaceutical companies, Novartis of Switzerland, was formed by the $30 billion merger of Sandoz and Ciba- Geigy, announced in 1996. But this merger was much more than a simple com- bination of businesses. Under the leadership of the new CEO, Daniel Vasella, Sandoz and Ciba-Geigy were transformed into an entirely new company. Using the merger as a catalyst for change, Vasella and his management team not only captured $1.4 billion in cost synergies but also redefined the com- pany’s mission and strategy, portfolio and organization, and all key processes from research to sales. In all areas, there was no automatic choice for either the Ciba or the Sandoz way of doing things; instead, a systematic effort was made to find the best way of doing things.